The Check Clearing for the 21st Century Act (Check 21) became effective on October 28, 2004, making it lawful for banks and businesses to replace paper checks with digital copies of the originals, known as substitute checks or image replacement documents (IRDs). Given the immaturity of this payment method, the lack of standards governing image transmissions, and the fact that most banks are still upgrading their infrastructures to accept check images from customers, Check 21 has yet to gain widespread adoption in business circles. However, many VARs, including veteran forms and remittance processing integrator Fairfax Imaging, Inc., believe it is only a matter of time until the rush to deploy Check 21 processing platforms begins.
"I believe most banks will be able to accept and process substitute checks within the next one to two years," says Steve Chahal, principal of Fairfax Imaging. "Once this occurs, IT and operations managers of remittance-intensive organizations will be more inclined to add Check 21 technology to their business environments. The benefits to be gained in terms of time savings, eliminated shipping costs, and improved cash flow will be too great to ignore."
In anticipation of this move toward Check 21 payment environments, Fairfax Imaging has begun to add Check 21 processing capabilities to its Quick Modules software. Quick Modules is a set of 25 document imaging and classification programs developed by Fairfax Imaging that integrate with high-volume scanning devices and data capture software to create turnkey remittance processing systems. By perfecting the Check 21 attributes of its software now, rather than waiting for the platform to become more mainstream, Fairfax Imaging hopes to cash in on the wave of early adopters and position itself as an expert in Check 21 deployments.
Do Your Check 21 Research
Given that Check 21 is a relatively new development, Fairfax Imaging had to research the requirements of the law extensively before it could update its software. This turned out to be more difficult than the integrator anticipated.
"There is no manual on Check 21," says Chahal. "No single publication has it all. You really have to dig to find information such as the legal implications of Check 21, the retention period of substitute checks, and what constitutes an acceptable IRD."
Conferences held by the AFP (Association of Financial Professionals) and NACHA (National Automated Clearing House Association), also known as the Electronic Payments Association, helped educate Chahal on Check 21 specifics. "The AFP and NACHA are pioneering work in the Check 21 arena," says Chahal. "Through case studies presented at these conferences, I saw how some businesses are already benefiting from Check 21 and learned what it would entail to upgrade our software accordingly."
Fairfax Imaging determined the best place to start was to upgrade the imaging output module included in its Quick Modules software and make it X9.37 compliant. X9 is the accredited standards committee that sets standards for the financial industry, and X9.37 is the document that defines the operational details for electronic check presentment -- known as an electronic cash letter. These specifications can be obtained through the X9 Web site, www.x9.org.
However, making an output module X9.37 compliant isn't as easy as following the documented specifications. "Different banks have different variations of X9.37," says Tony Cristofano, principal of Fairfax Imaging. "These variations don't stray far from the X9.37 standard, but each bank may require a slightly different data format. We are working with major banks to build a database of these formats so we can configure a Check 21 system with minimal effort, regardless of what bank the customer deals with."
Focus On Existing Clients For Initial Check 21 Sales
Fairfax Imaging began by making its output module X9.37 compliant because the most immediate Check 21 opportunities for the integrator lie with its existing customer base. For more than a decade, Fairfax Imaging has been installing large, traditional remittance processing systems to government organizations and Fortune 100 companies. These organizations can achieve a significant ROI by adopting a Check 21 platform because they process thousands of checks each day. Plus, since these customers already have a processing infrastructure in place, Fairfax Imaging can enable them to submit substitute checks simply by switching the output module.
"Our existing remittance processing customers will be our first Check 21 customers," says Cristofano. "This is advantageous for us because our existing customers are already familiar with us and our software. It's not like selling from scratch."
While immediate potential lies with remittance-intensive organizations, Fairfax Imaging is not ignoring other Check 21 opportunities on the not-too-distant horizon. "We believe there is a market out there for smaller businesses, like dentists' offices and local grocery stores, to take advantage of Check 21," says Chahal. "By connecting a small $300 check scanner with MICR [magnetic ink character recognition] capabilities to a PC, a smaller business can scan checks each day and upload them to its bank for deposit." Fairfax Imaging is currently modifying its input modules and CAR (courtesy amount recognition) and LAR (legal amount recognition) modules to open up this new market to the integrator. "To gain business in these smaller markets, we'll need to offer the solution at a much lower price point," adds Chahal. "Since these businesses are only processing a handful of checks a day, it will be more difficult for them to achieve an ROI that justifies the purchase."
Sell The Time And Cost Savings Of Check 21
Given that the law is so new, the best sales tool when selling Check 21 technologies may simply be to explain the financial benefits of what the law enables a business to do. In traditional check processing environments, checks are imaged and data is captured during an initial pass through a scanning device. Checks must then be passed through the scanner a second time to encode the checks by printing the information obtained during the data capture process in the lower right hand corner of the check in MICR font. For example, if the data capture software reads $50 in the legal amount area, then $50 is encoded at the bottom of the check. With Check 21, this encoding process can be performed electronically on the check image, eliminating the need to pass the checks through the scanner a second time, reducing the user's workload by about 30%.
Secondly, Check 21 eliminates the cost associated with shipping paper checks to a bank for processing because the substitute check can be sent electronically. Also, once a batch of checks is imaged and uploaded to a bank, the payments are recognized immediately, significantly reducing the float period (i.e. the amount of time between when a deposit is made and when the funds are actually available) and increasing cash flow.
Overcome Check 21 Uncertainty With Reference Cases
While they may have heard of it, Check 21 may still be an exotic concept to many businesses. They may not know the benefits, whether their bank accepts substitute checks, or whether their business is ready for it. This lack of information can be a barrier to entry for early adoption of Check 21 technology. Fairfax Imaging believes solid reference cases can help overcome this objection.
"We are currently working with a couple of our enthusiastic customers to enable them to submit substitute checks to their respective banks, Bank of America and Wells Fargo," says Chahal. "With success stories involving two major U.S. banks, we should be able to convince others to make the move. We are also working with our own bank to make deposits in a Check 21-compliant manner so that we can use ourselves as a reference case."
Fairfax Imaging has completed the initial X9.37 upgrade to its output module, but continues to add bank variation information to its database. Also, the integrator is still refining its input modules to meet the Check 21 requirements of smaller customers. To date, Fairfax Imaging has not yet fully implemented a Check 21 solution for any of its clients, but 2 are in the process of being upgraded to a Check 21 platform and 10 to 12 others are interested in following suit.
The lack of immediate payback on its Check 21 technology enhancements does not seem to bother the integrator. "The remittance processing industry is moving in the direction of Check 21, and we can't afford not to be part of it," says Cristofano. "It may cost us money up front, but within the next one to two years, Check 21 will be a requirement on every job we encounter. During this period, businesses will start receiving letters from their banks informing them that they can submit substitute checks. When this happens, we will already have the technology in place to allow them to take advantage of this new payment option."
Handle Checks In The Mail With The Appropriate Scanner
While Fairfax Imaging, Inc. installs remittance processing systems for large government agencies and Fortune 100 companies, only 30% of the integrator's client base processes only checks. The other 70% receives checks in a mail stream with other forms and documents that require data capture and processing. Fairfax Imaging has always positioned itself as a digital mail company. The integrator built its software, Quick Modules, on the philosophy that all documents received in the mail stream (e.g. checks, forms, correspondence, envelopes) should be scanned together with minimal up-front document prep work. However, software is only half the solution. The integrator needs to be sure the scanning hardware it uses is capable of imaging documents in this fashion. That's why Fairfax Imaging partners with Imaging Business Machines, LLC (IBML).
IBML's ImageTrac scanning platform allows documents of intermixed sizes (e.g. from a business card to an A3 sheet) and weights (e.g. from onion skin to card stock) to be imaged at speeds of up to 380 ppm (pages per minute). The scanners also have a high tolerance for creased documents, staples, and paper clips. Plus, the ImageTrac scanners provide a quick jam recovery feature that ensures full batch integrity is maintained.
"IBML provides the vehicle for us to process checks, as well as forms and correspondence, all in one workflow," says Steve Chahal, principal of Fairfax Imaging. "This provides us with an advantage over our competitors that process checks in one data stream, send forms and letters to another, and then try to marry this information back together again on the back end."
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